Salary exchange and six-figure curse

lynxthecat

Consider a remuneration package of:

- £110,000 p.a. base
- variable bonus paid in month of May each year
- 6% employer pension contribution based on £110,000 [£6,600 p.a.]

Would the following salary exchange mechanism work, mindful of the annual allowance and associated pension provisions:

1) £12,000 p.a. from base salary exchanged as employer pension contributions, i.e. £1,000 per month

2) Bonus is exchanged as one-off employer pension contribution up to and not exceeding the value of £20,000

3) Any remaining bonus is paid as normal

Thus if bonus exceeds £20,000, then the above system should result in an annual pension contribution of:

6% of £110,000, which is £6,600 + £12,000 base sacrifice + £20,000 bonus sacrifice,

... which totals £38,600.

Which is below the £40,000 annual allowance.

Does the above system seem reasonable?

EdSwippet

lynxthecat wrote: »

Does the above system seem reasonable?

This looks right to me. At these salary levels you might also have to watch out for the miserable tapered annual allowance. Remember that the income level for triggering this taper includes not just salary but all taxable income. So salary, dividends, interest, rental income, and so on.

Snakey

Check that your employer doesn't give you an uplift on any "employee" contributions. If they were to, say, add on the 13.8% employers' NIC saving, you'd need to recalculate your amounts so as not to go over the limit.

That said, if this is a new and shiny system of yours and you previously only did 6% (or even 6% matched) you would have some brought-forward annual allowance to cushion you for the first three years and it would be worth doing that to avoid the 62% marginal rate.

mgdavid

Workerbee999 wrote: »

.........

We can’t do both, .....

yet you both pay HRT?
You absolutely sure you can't do (a bit of) both??

lynxthecat

Am I correct that with the system above, for the first few years in respect of the unused allowance from previous years, private pension contributions can be made (which receive 20% relief at pension provider) and tax relief can be claimed from HMRC on the marginal rate?

bowlhead99

lynxthecat wrote: »

Am I correct that with the system above, for the first few years in respect of the unused allowance from previous years, private pension contributions can be made (which receive 20% relief at pension provider) and tax relief can be claimed from HMRC on the marginal rate?

The way I think of it or that the amount that can end up in your pension gross is the lesser of £40k and [earnings including the DC contribution from your employer] ; but the figure of £40k may be reduced by taper (if you had a big bonus and ended up on £150k+), and increased by the carry-forward available from previous years where you didn't use your full [£40k or less if tapered down for high earnings].

So if I'm reading your question correct, then when you first start following your plan you will likely have some spare unused allowance from previous years - and yes, you can use that up by making personal contributions out of your taxed salary into a pension. E.g. £800 into pension from your after-tax salary, provider will claim a gross up from HMRC in due course, and separately you tell HMRC what you paid in via your tax return and they work out that the £1000 in your pension should have only cost you (e.g.) £400 if you're in the awkward 60% tax bracket, or £600 if you're in the 40% bracket at that stage, or a blend of the two depending on your actual marginal rate of tax for that £1000. So you'll get back the difference between the £800 you paid and the [£400 to £600] it should have cost you to make that £1000 gross contribution.

Effectively what you end up paying ends up being your marginal rate and of course if you did an absolutely massive contribution that marginal rate on some of the contributions might only be 20%, but you'd probably have the sense to stop and carry forward for future years to save at 40-60% instead...

The extra amount of carry forward from previous years, you don't *have* to do as a private contribution, in theory If you had visibility over your spare cash and likely bonus and amount of known carry forward available you could just ask your employer to let you sacrifice even larger amounts and save even more NI. But employer HR or payroll depts typically get nervous about letting someone exchange over £40k in a year because of feeling some kind of implicit responsibility to check your carry forward allowance exists, which they can't do without knowing your private financial details and they're not tax advisors. So a private contribution yourself before 5April is usually the way to go.

kidmugsy

EdSwippet wrote: »

So salary, dividends, interest, rental income, and so on.

Plus the employer's contribution and salary sacrificed. It's rather easy for the very highly paid to find that their Adjusted Income exceeds £150k. Then unless their threshold income is less than £110k the taper sets in.

In the OP's shoes if I had enough unused Annual Allowance to carry forward I'd opt to try to avoid the 60% tax band. After all, unused carry forward won't last for ever. Seize the day.

This chap is good on the subject.
https://3652daysblog.wordpress.com/2018/03/05/pension-allowance-taper/